What is a Qualified Appraisal? Part One
Taxpayers may deduct the fair market value (as determined by a qualified appraisal) of property that they contribute to charity from their taxable income. The Pension Protection Act of 2006 added the notion of a qualified appraisal to the tax code. A qualified appraisal made by a qualified appraiser is generally necessary to support the value of noncash charitable contributions of $5,000 or more. However, privately held stock only requires a qualified appraisal if its fair market value exceeds $10,000. In addition, tax filers need to attach Form 8283 to their tax return with the appropriate parts filled out by the qualified appraiser. The IRS has issued transitional guidance regarding the appraisal requirements. The IRS provides general guidance regarding the determination of the value of donated property in its Publication 561.
1. What is a Qualified Appraisal?
A qualified appraisal is an appraisal document that:
– is made, signed, and dated by a qualified appraiser in accordance with generally accepted appraisal standards;
– meets the relevant requirements of Regulations section 1.170A-13(c)(3) and Notice 2006-96, 2006-46 I.R.B. 902 (available at www.irs.gov/irb/2006-46_IRB/ar13.html);
– relates to an appraisal made not earlier than 60 days before the date of contribution of the appraised property;
– does not involve a prohibited appraisal fee; and
– includes certain information.
The qualified appraisal must be received before the due date, including extensions, of the return on which a charitable contribution deduction is first claimed for the donated property. If the deduction is first claimed on an amended return, the qualified appraisal must be received before the date on which the amended return is filed.
2. What is a prohibited appraisal fee?
Generally, no part of the fee arrangement for a qualified appraisal can be based on a percentage of the appraised value of the property. If a fee arrangement is based on what is allowed as a deduction after Internal Revenue Service examination or otherwise, it is treated as a fee based on a percentage of appraised value, rendering disqualification of the appraisal.
3. Information included in qualified appraisal:
A qualified appraisal must include the following information:
1. a description of the property in sufficient detail for a person who is not generally familiar with the type of property to determine that the property appraised is the property that was (or will be) contributed;
2. the physical condition of any tangible property;
3. the date (or expected date) of contribution;
4. the terms of any agreement or understanding entered into (or expected to be entered into) by or on behalf of the donor that relates to the use, sale, or other disposition of the donated property, including for example, the terms of any agreement or understanding that:
a. temporarily or permanently restricts a donee’ s right to use or dispose of the donated property,
b. earmarks donated property for a particular use, or
c. reserves to, or confers upon, anyone (other than a donee organization or an organization participating with a donee organization in cooperative fundraising) any right to the income from the donated property or to the possession of the property, including the right to vote donated securities, to acquire the property by purchase or otherwise, or to designate the person having the income, possession, or right to acquire the property;
5. the name, address, and taxpayer identification number of the qualified appraiser and, if the appraiser is a partner, an employee, or an independent contractor engaged by a person other than the donor, the name, address, and taxpayer identification number of the partnership or the person who employs or engages the appraiser;
6. the qualifications of the qualified appraiser who signs the appraisal, including the appraiser’s background, experience, education, and any membership in professional appraisal associations;
7. a statement that the appraisal was prepared for income tax purposes;
8. the date (or dates) on which the property was valued;
9. the appraised fair market value on the date (or expected date) of contribution;
10. the method of valuation used to determine fair market value, such as the income approach, the comparable sales or market data approach, or the replacement cost less depreciation approach; and
11. the specific basis for the valuation, such as any specific comparable sales transaction.
The Pension Protection Act also adds the notion of a qualified appraiser. We will discuss the necessary qualifications in the next blog post on “What is a Qualified Appraiser?”.
Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst designation, and a member of the National Association of Certified Valuation Analysts. Gunther is Chairman of the Software/IT Industry Group of the German American Business Association (GABA).
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